Running on Empty: Canada’s Persistent Business R&D Weakness

Canada’s business sector is a weak spender on research and development, and performance has been declining for nearly 15 years. On the Conference Board’s most recent Report Card on Innovation, Canada achieved a grade of “D” and ranked 15th of 16 peer countries in business enterprise research and development spending (BERD).

Making the situation even more precarious for Canada, is the fact that only a dozen firms account for roughly half of all BERD in Canada. This means that Canada’s business research and development (R&D) performance—a key part of innovation—is tightly bound to the fortunes and decisions of just a handful of companies. To ensure more resilient business R&D and innovation performance, Canada must find ways to stimulate not only more spending, but also spending by more firms.

Why Is Business R&D Spending Important to Innovation?

Business enterprise expenditure on R&D is an important indicator of business commitment to innovation. Although not a direct measure of innovation performance (because investments can be poorly selected and results are not guaranteed), the development of new or improved products, processes, and services frequently requires R&D efforts. Moreover, research shows that R&D spending is associated with productivity and GDP growth. A cross-national study conducted by the OECD found that a “sustained increased of 0.1 percentage points in a nation’s BERD-to-GDP ratio would eventually translate to a 1.2 per cent higher GDP per capita, other things being equal.”1

How Are Canadian Firms Doing?

Although Canadian firms spent $15.4 billion on R&D in 2014, as a group they spend much less as a percentage of GDP than their international peers.2 Moreover, BERD as a percentage of GDP has fallen dramatically in Canada over the past 15 years, while the average has continued to climb among the 16 peer countries the Conference Board examines in its How Canada Performs Report Card, as well as in the OECD overall.3 (See Chart 1.) In 2013, BERD amounted to 0.82 per cent of GDP in Canada, while it was more than twice as high in the United States (1.96 per cent), three times higher in Japan (2.65 per cent), and approximately four times higher in Korea (3.26 per cent) and Israel (3.49 per cent).

Canada’s economy is weighted more toward resource-related companies than are the economies of many its peers, and the resource sector tends to spend less on R&D than other sectors. However, analysis conducted by the Expert Panel on Business Innovation found that “generally lower Canadian R&D spending within the same sectors in both the United States and Canada accounts for a greater proportion of the gap [in BERD between the two countries] … than does Canada’s adverse sector mix—i.e., the greater weight in Canada’s economy of resource-related and other activities that have inherently low R&D spending.”4 With few exceptions, Canadian businesses across sectors have lower BERD intensity than their American competitors.

Who Is Spending?

Another troubling issue is the fact that just 12 companies account for roughly half of all BERD in Canada. In 2013, the top 10 business R&D spenders in Canada accounted for approximately $7.2 billion—46 per cent—of Canada’s $15.5 billion total BERD. That proportion reaches 49 per cent, when the 11th and 12th top spenders are added to the total. In fact, the top three R&D spenders in 2013—Bombardier ($2.2 billion), BlackBerry ($1.3 billion), and Magna International ($577 million)—together account for more than a quarter of all BERD.5 (See Chart 2.)

That Canada’s BERD depends so heavily on a few firms—at the same time that it lags international peers overall—raises questions about the resiliency of this key element of Canada’s innovation ecosystem. Should one of the top three or four spenders cut back on, or eliminate, its R&D activity, Canada likely would be unable to turn its overall performance around and close the BERD gap with international peers. In fact, Bombardier—the leading spender in 2013—has already indicated that its R&D investments will decrease, given that engineering and tooling activities associated with its new business jets have already been completed.

From Understanding to Action

Why so few Canadian businesses have robust R&D programs, and why overall BERD continues to decline, is a puzzle. As part of the How Canada Performs: Report Card on Innovation project (set for release in fall 2015), the Conference Board is examining how differences in provincial economies and innovation ecosystems might explain variations in firms’ decisions to spend on R&D and to pursue innovation strategies. Do varying levels of competition explain differences in BERD by province? Do varying levels of, and approaches to, public R&D spending stimulate or crowd out business R&D activity? What policy responses, if any, can and should be taken?

What is clear is that Canada’s current level and concentration of business R&D indicates a weak commitment to innovation among firms. If Canadian businesses want to be globally competitive—and if they are to help sustain and enhance Canadians’ standard of living—more of them will need to increase R&D activity.

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